CYS Investments, Inc. Announces Fourth Quarter 2011 Financial Results

NEW YORK--(BUSINESS WIRE)--CYS Investments, Inc. (NYSE: CYS) (“CYS” or the “Company”) today
announced financial results for the quarter and year ended December 31,
2011.

Fourth Quarter 2011 Highlights

GAAP net income of $44.1 million, or $0.53 per diluted share.

Core Earnings of $37.8 million, or $0.46 per diluted share.

A component of the Company’s net income for the quarter was $4.2
million, or $0.05 per diluted share, of appreciation on forward
settling purchases (also referred to as “drop income”) that was
accounted for as net gain from investments on our statement of
operations and therefore excluded from our Core Earnings.

Operating expenses of 1.53% of average net assets.

December 31, 2011 net asset value of $13.02 per share after declaring
a $0.50 dividend per share on December 8, 2011.

Interest rate spread net of hedge of 1.80%.

Weighted average amortized cost of Agency RMBS of $102.50.

Public Offering

On February 1, 2012, the Company completed an underwritten public
offering of 28,750,000 shares of common stock, raising approximately
$377.3 million of net proceeds, bringing the total number of shares of
common stock outstanding to 111,688,636 at February 1, 2012. As of
February 7, 2012 the Company had invested all of the proceeds of this
offering in Agency RMBS with settlement dates between February 2012 and
May 2012.

Fourth Quarter 2011 Results

The Company had net income of $44.1 million during the fourth quarter of
2011, or $0.53 per diluted share, compared to net income of $96.3
million, or $1.16 per diluted share, in the third quarter of 2011.
During the fourth quarter of 2011, the Company had Core Earnings of
$37.8 million, or $0.46 per diluted share, compared to $34.5 million, or
$0.42 per diluted share, in the third quarter of 2011. Core Earnings
represents a non-GAAP financial measure and is defined as net income
(loss) excluding (i) net realized gain (loss) on investments and
termination of swap contracts and (ii) net unrealized appreciation
(depreciation) on investments and swap and cap contracts. The
quarter-over-quarter increase in Core Earnings was generally the result
of the decrease in operating expenses primarily due to the $4.9 million
non-recurring third quarter expense associated with the internalization
of management.

The Company utilizes forward settling transactions for the majority of
its purchases. The benefit of purchasing assets in forward settling
transactions is that the Company can purchase assets with specified
stipulations such as average loan size and percentage of loans in a
particular state. This customization allows the Company to better manage
prepayments. In addition, forward settling purchases allow the Company
to obtain an asset at a discount (also referred to as “drop”) to its
current market value; however, the Company does not receive any interest
income on the asset until the forward transaction settles. Obtaining the
asset at a discount to market value reduces the impact of prepayments
and is accretive to net asset value.

Drop income is a component of our net income accounted for as net gain
from investments on our statement of operations and therefore excluded
from our Core Earnings. During the fourth quarter of 2011, the Company
generated drop income of approximately $4.2 million, or $0.05 per
diluted share, compared to approximately $8.1 million, or $0.09 per
diluted share, during the third quarter of 2011. During the fourth
quarter of 2011, the Company made forward purchases of approximately
$0.8 billion of Agency RMBS with a weighted average drop of
approximately $0.21 per $100.00 par value per month compared to
approximately $1.6 billion of Agency RMBS with a weighted average drop
of approximately $0.27 per $100.00 par value per month during the third
quarter of 2011.

The Company received $2.3 million of distributions from CLOs during the
fourth quarter of 2011, with $1.2 million accounted for as a reduction
of their cost basis and thereby excluded from our interest income and
Core Earnings. This compared to distributions of $2.2 million from CLOs
during the third quarter of 2011, with $1.2 million accounted for as a
reduction of their cost basis.

The Company’s net asset value per share on December 31, 2011 was $13.02
after declaring a $0.50 dividend per share on December 8, 2011, compared
with $12.98 at September 30, 2011. The increase was primarily the result
of Agency RMBS outperforming swaps.

The Company’s operating expenses were $4.1 million, or 1.53% of average
net assets, for the fourth quarter of 2011, compared to $9.8 million, or
2.33% of average net assets, for the third quarter of 2011. The decrease
in operating expenses was primarily the result of the $4.9 million of
non-recurring expenses incurred in the third quarter of 2011 relating to
the internalization of management.

(dollars in thousands)

Three Months Ended

Key Portfolio Statistics*

December 31, 2011

September 30, 2011

Average Agency RMBS (1)

$8,624,497

$8,350,710

Average repurchase agreements (2)

7,787,405

7,474,253

Average net assets (3)

1,066,036

1,061,373

Average yield on Agency RMBS (4)

2.81%

3.02%

Average cost of funds and hedge (5)

1.01%

1.07%

Interest rate spread net of hedge (6)

1.80%

1.95%

Operating expense ratio (7)

1.53%

2.33%

Leverage ratio (at period end) (8)

7.7:1

7.7:1

(1) Our average Agency RMBS for the period was calculated by
averaging the month end cost basis of our settled Agency RMBS during the
period.(2) Our average repurchase agreements for the
period were calculated by averaging the month end repurchase agreements
balance during the period.(3) Our average net assets
for the period were calculated by averaging the month end net assets
during the period.(4) Our average yield on Agency RMBS
for the period was calculated by dividing our interest income from
Agency RMBS by our average Agency RMBS.(5) Our average
cost of funds and hedge for the period was calculated by dividing our
total interest expense, including our net swap and cap interest income
(expense), by our average repurchase agreements.(6) Our
interest rate spread net of hedge for the period was calculated by
subtracting our average cost of funds and hedge from our average yield
on Agency RMBS.(7) Our operating expense ratio is
calculated by dividing operating expenses by average net assets.(8)
Our leverage ratio was calculated by dividing (i) the Company’s
repurchase agreements balance plus payable for securities purchased
minus receivable for securities sold (ii) by net assets. Prior to
December 31, 2011, our leverage ratio was calculated by dividing total
liabilities by net assets which resulted in a leverage ratio of 7.9:1
for the period ended September 30, 2011. The Company believes the new
calculation is a better representation of leverage because it reflects
its borrowings in connection with its portfolio by excluding receivable
for securities sold, which will decrease liabilities when settled, and
including payable for securities purchased, which is an additional form
of leverage.* All percentages are annualized.

Prepayments

The portfolio recorded $577.1 million in scheduled and unscheduled
principal repayments and prepayments, which equated to a constant
prepayment rate (“CPR”) of approximately 19.6%, and net amortization of
premium of $16.6 million for the fourth quarter of 2011. This compared
to $413.6 million in scheduled and unscheduled principal repayments and
prepayments, which equated to a CPR of approximately 14.9% and net
amortization of premium of $12.8 million for the third quarter of 2011.
The increase in prepayments and repayments was the result of (i) a
further decrease in mortgage interest rates and (ii) the seasoning of
our portfolio. The Company’s Agency RMBS portfolio is made up of 0.2%
2008 production; 8.1% 2009 production; 27.3% 2010 production and 64.4%
2011 production.

Dividend

The Company declared a common dividend of $0.50 per share with respect
to the fourth quarter of 2011, compared to $0.55 per share for the third
quarter of 2011. Using the closing share price of $13.14 on December 30,
2011, the fourth quarter dividend equates to an annualized dividend
yield of 15.2%.

Portfolio

At December 31, 2011, the Company’s $9.4 billion portfolio of Agency
RMBS was backed by fixed-rate mortgages and hybrid adjustable-rate
mortgages (“Hybrid ARMs”) with 0 to 84 months to reset. Additional
information about our Agency RMBS portfolio at December 31, 2011 is
summarized below:

Par Value

Fair Value

Weighted Average

FairValue/Par

Asset Type

(in thousands)

Cost/Par

MTR(1)

Coupon

CPR(2)

10 Year Fixed Rate

$ 272,115

$ 284,948

$ 103.96

$ 104.72

N/A

3.50%

13.6%

15 Year Fixed Rate

4,763,965

5,010,121

102.53

105.17

N/A

3.79%

17.8%

20 Year Fixed Rate

551,766

585,103

102.32

106.04

N/A

4.14%

28.1%

30 Year Fixed Rate

239,747

259,123

103.09

108.08

N/A

5.00%

26.3%

Hybrid ARMs

3,098,024

3,233,159

102.31

104.36

64.0

3.29%

20.3%

Total/Weighted Average

$ 8,925,617

$ 9,372,454

$ 102.50

$ 105.01

64.0(3)

3.66%

19.5%

(1) MTR, or “Months to Reset” is the number of months
remaining before the fixed rate on a hybrid ARM becomes a variable rate.
At the end of the fixed period, the variable rate will be determined by
the margin and the pre-specified caps of the ARM. After the fixed
period, 100% of the hybrid ARMS in the portfolio reset annually.

(2) CPR is a method of expressing the prepayment rate for a
mortgage pool that assumes that a constant fraction of the remaining
principal is prepaid each month or year. Specifically, the constant
prepayment rate is an annualized version of the prior three month
prepayment rate for those bonds held at December 31, 2011. Securities
with no prepayment history are excluded from this calculation.

(3) Weighted average months to reset of our hybrid ARM
portfolio.

Financing, Leverage & Liquidity

At December 31, 2011, the Company had financed its portfolio with
approximately $7.9 billion of borrowings under repurchase agreements
with a weighted average interest rate of 0.36% and a weighted average
maturity of approximately 27.6 days. In addition, the Company had
payable for securities purchased of $0.5 billion. The Company’s leverage
ratio at December 31, 2011 was 7.7 to 1. At December 31, 2011, the
Company’s liquidity position was approximately $580.0 million,
consisting of unpledged Agency RMBS, U.S. treasury bills and cash and
cash equivalents. Below is a list of outstanding repurchase agreements
at December 31, 2011 (dollars in thousands):

The Company utilizes interest rate swap and cap contracts to hedge the
interest rate risk associated with the financed portion of its Agency
RMBS portfolio. As of December 31, 2011, the Company had entered into 15
interest rate swap contracts with an aggregate notional amount of $4.7
billion, a weighted average fixed rate of 1.478% and a weighted average
expiration of 2.5 years. At December 31, 2011, the Company had entered
into three interest rate cap contracts with a notional amount of $0.7
billion, a weighted average cap rate of 1.593% and a weighted average
expiration of 3.6 years. These interest rate swap and cap contracts are
described below (dollars in thousands):

Interest Rate Swaps

Expiration

Fixed

Floating

Notional

Fair

Counterparty

Date

Pay Rate

Receive Rate(1)

Amount

Value

The Royal Bank of Scotland plc

May 2013

1.6000%

0.5117%

$ 100,000

$

(1,266)

The Royal Bank of Scotland plc

June 2013

1.3775%

0.5793%

300,000

(3,000)

The Royal Bank of Scotland plc

July 2013

1.3650%

0.4031%

300,000

(3,034)

Goldman Sachs

December 2013

1.3088%

0.5463%

400,000

(4,587)

The Royal Bank of Scotland plc

December 2013

1.2813%

0.5551%

500,000

(5,421)

Goldman Sachs

December 2013

1.2640%

0.5551%

400,000

(4,230)

Deutsche Bank Group

December 2013

1.3225%

0.5592%

400,000

(4,695)

The Royal Bank of Scotland plc

July 2014

1.7200%

0.5810%

100,000

(2,375)

Nomura Global Financial Products, Inc.

July 2014

1.7325%

0.4031%

250,000

(6,149)

Deutsche Bank Group

August 2014

1.3530%

0.4606%

200,000

(3,059)

Goldman Sachs

September 2014

1.3120%

0.5713%

500,000

(7,115)

Deutsche Bank Group

October 2014

1.1725%

0.3809%

240,000

(2,520)

Goldman Sachs

February 2015

2.1450%

0.4528%

500,000

(20,274)

Nomura Global Financial Products, Inc.

June 2016

1.9400%

0.5289%

300,000

(11,027)

Morgan Stanley Capital Services, Inc.(2)

December 2016

1.4263%

0.7438%

250,000

(724)

Total

$4,740,000

$

(79,476)

Interest Rate Caps

Expiration

Notional

Fair

Counterparty

Date

Cap Rate

Amount

Value

The Royal Bank of Scotland plc

December 2014

2.0725%

$ 200,000

$

656

The Royal Bank of Scotland plc

October 2015

1.4275%

300,000

3,062

The Royal Bank of Scotland plc

November 2015

1.3600%

200,000

2,248

Total

$ 700,000

$

5,966

_______________

(1) Resets quarterly to 3-Month LIBOR(2) The
interest rate swap effective date is December 19, 2012 and does not
accrue any income or expense until that date.

Results for the Year Ended December 31, 2011

The Company had net income of $291.9 million during the year ended
December 31, 2011, or $3.66 per diluted share, compared to $22.4
million, or $0.73 per diluted share, in 2010. The year-over-year
increase in net income was primarily the result of the increase in
average settled Agency RMBS combined with the increase the in fair value
of Agency RMBS. During the year ended December 31, 2011 the fair market
value of Agency RMBS backed by 15 year 4.0% coupons increased $2.937 to
$105.515 at December 31, 2011. During the year ended December 31, 2011,
the Company had Core Earnings of $135.4 million, or $1.69 per diluted
share, compared to $41.5 million, or $1.40 per diluted share, in 2010.
During the year ended December 31, 2011, the Company generated drop
income of approximately $32.3 million, or $0.41 per diluted share,
compared to approximately $29.3 million, or $1.03 per diluted share,
during the year ended December 31, 2010. The year-over-year increase in
Core Earnings per diluted share was primarily the result of the increase
in average settled Agency RMBS. During the year ended December 31, 2011,
the Company had an interest rate spread net of hedge of 1.97% compared
to 2.15% in 2010.

Conference Call

The Company will host a conference call at 8:30 AM Eastern Time on
Wednesday, February 8, 2012, to discuss its financial results for the
quarter and year ended December 31, 2011. To participate in the event by
telephone, please dial 866.356.4279 at least 10 minutes prior to the
start time and reference the conference passcode 36960732. International
callers should dial 617.597.5394 and reference the same passcode. The
conference call will also be webcast live over the Internet and can be
accessed at the Company’s web site at http://www.cysinv.com.
To listen to the live webcast, please visit http://www.cysinv.com
at least 15 minutes prior to the start of the call to register,
download, and install necessary audio software. A dial-in replay will be
available on Wednesday, February 8, 2012, at approximately 12:00 PM
Eastern Time through Wednesday, February 22, 2011, at approximately
11:00 AM Eastern Time. To access this replay, please dial 888.286.8010
and enter the conference ID number 30294991. International callers
should dial 617.801.6888 and enter the same conference ID number. A
replay of the conference call will also be archived on the Company’s
website at http://www.cysinv.com.

About CYS Investments, Inc.

CYS Investments, Inc. is a specialty finance company that invests on a
leveraged basis in residential mortgage pass-through certificates for
which the principal and interest payments are guaranteed by Fannie Mae,
Freddie Mac or Ginnie Mae. The Company refers to these securities as
Agency RMBS. CYS Investments, Inc. has elected to be taxed as a real
estate investment trust for federal income tax purposes.

Core Earnings represents a non-GAAP financial measure and is defined as
net income (loss) excluding net realized gain (loss) on investments, net
unrealized appreciation (depreciation) on investments, net realized gain
(loss) on termination of swap contracts and unrealized appreciation
(depreciation) on swap and cap contracts. In order to evaluate the
effective yield of the portfolio, management uses Core Earnings to
reflect the net investment income of our portfolio as adjusted to
include the net swap and cap interest income (expense). Core Earnings
allows management to isolate the interest income (expense) associated
with our swaps and caps in order to monitor and project our borrowing
costs and interest rate spread. In addition, management utilizes Core
Earnings as a key metric in conjunction with other portfolio and market
factors to determine the appropriate leverage and hedging ratios, as
well as the overall structure of the portfolio.

The Company adopted Accounting Standards Codification (“ASC”) 946, Clarification
of the Scope of Audit and Accounting Guide Investment Companies (“ASC
946”), prior to its deferral in February 2008, while most, if not
all, other public companies that invest only in Agency RMBS have not
adopted ASC 946. Under ASC 946, the Company uses financial reporting
specified for investment companies, and accordingly, its investments are
carried at fair value with changes in fair value included in earnings.
Most other public companies that invest only in Agency RMBS include most
changes in the fair value of their investments within shareholders’
equity, not in earnings. As a result, investors are not able to readily
compare the Company’s results of operations to those of most of its
competitors. The Company believes that the presentation of its Core
Earnings is useful to investors because it provides a means of comparing
its Core Earnings to those of its competitors. In addition, because Core
Earnings isolates the net swap and cap interest income (expense) it
provides investors with an additional metric to identify trends in the
Company’s portfolio as they relate to the interest rate environment.

The primary limitation associated with Core Earnings as a measure of the
Company’s financial performance over any period is that it excludes the
effects of net realized gain (loss) from investments. In addition, the
Company’s presentation of Core Earnings may not be comparable to
similarly-titled measures of other companies, who may use different
calculations. As a result, Core Earnings should not be considered as a
substitute for the Company’s GAAP net income (loss) as a measure of our
financial performance or any measure of our liquidity under GAAP.